BoE has spelt out what was at stake when events last week turned extreme, though surely not unimaginable
It was a close-run thing. That is a less-than-reassuring summary of the Bank of England’s analysis of its emergency intervention in the gilts market last week. Sir Jon Cunliffe, deputy governor for financial stability, spelled out what was at stake: “An excessive and sudden tightening of financing conditions for the real economy.” Translation: the current bout of turmoil in the mortgage market, for instance, would feel like a minor squall.
Some of the numbers in Cunliffe’s 11-page letter to the Treasury select committee are extraordinary. Pension funds, facing demands to put up collateral to support their holdings in LDIs, or liability-driven investments, were looking at dumping £50bn of long-dated government debt in “a short space of time”. This is a market where daily trading volumes are just £12bn.
